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Long Debt Path for Australia

SYDNEY, Australia — Just three months in power, Australia’s Liberal National government has abandoned all thought of returning to a budget surplus and predicted deficits for the next decade without spending cuts, heralding sober times ahead for the resource-rich country.

As subpar economic growth and a cooling mining boom carve a hole in government finances, Treasurer Joe Hockey warned Tuesday that Australia had to climb a “challenging fiscal and economic mountain.”

“Returning the budget to sustainable surpluses will not be achieved by piecemeal savings here and there,” Mr. Hockey said as he announced the country’s third-largest deficit on record. “It will require a sustained and fundamental structural overhaul of expenditure.”

The coalition government now expects a shortfall of 47 billion Australian dollars, or $42 billion, for the fiscal year that ends next June, compared with a forecast of 30.1 billion dollars made only four months ago. The gap would narrow slightly, to 33.89 billion dollars in the next budget year, 24 billion dollars the year after and 17.7 billion in the fiscal year that begins in 2016.

“It highlights the scale of the funding challenge ahead,” said Su-Lin Ong, a senior economist at RBC Capital Markets. “It’s not a debt path you would want to remain on, so there’s going to have to be a tough conversation on what amount of austerity lies ahead.”

The scope for drastic spending cuts or tax increases is limited by the sluggish economy, which grew 2.3 percent in the year to September. Mr. Hockey forecast growth of 2.5 percent in the current and next fiscal years, short of the pace of 3.25 to 3.5 percent considered normal in a country that has not suffered a recession for 22 years.

The Reserve Bank of Australia, the central bank, has done what it can to support growth by cutting the benchmark interest rate to a historic low of 2.5 percent, but has appeared reluctant to ease further for fear of stoking a speculative bubble in housing prices.

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Some of the deterioration in the budget bottom line is because of steps taken by the new government, in particular a plan to give 8.8 billion dollars to the central bank to help rebuild its reserves.

Economists had expected a significant deterioration in the fiscal position, with the conservative government, led by Prime Minister Tony Abbott, likely to frontload revenue shortfalls and spending to improve the outlook for later years.

Market reaction was slight on Tuesday in part because Australia’s debt position is relatively benign compared with its peers in the developed world. Even though debt is expected to peak above 400 billion dollars, that would be less than 30 percent of the country’s 1.5 trillion-dollar annual gross domestic product. In the United States and the euro area, government debt accounts for more than 100 percent of G.D.P., figures from the Organization for Economic Cooperation and Development show.

While the budget has bled red ink for months now, there has been scant sign of alarm from offshore investors. Foreigners bought a net 15 billion dollars of government debt in the three months ending in September, the biggest increase since early 2012. While borrowing costs have risen in the past few months, that was primarily driven by an increase in United States Treasury yields, which act as a benchmark for bonds globally.

At 4.31 percent, yields on Australian 10-year bonds remain very low by historical standards.

Australia remains one of only a handful of countries that still has a triple-A credit rating, making its debt especially attractive to foreign central banks and sovereign wealth funds. Ratings agencies have signaled that the outlook for Australia’s rating is stable, as long as the government has set out a credible long-term path to repairing the budget.

“The lowering of the G.D.P. growth forecast next year and the resultant substantially larger fiscal deficits are clearly credit negative for the government’s debt position,” Moody’s Investors Service said Tuesday. But that would not alter the stable outlook because the rise in debt would still leave Australia “in a relatively favorable position compared to almost all other Aaa-rated sovereigns,” it said.